Business angels are ploughing millions in to fledgling companies but many may find their plans are thwarted by a lack of investments.
Venture Capital Trusts (VCT) attracted £169.5 million from investors by the end of December 2016 – a surge of 53% over the amount collected 12 months earlier.
The Association of Investment Companies (AIC), which collected the data, explained the increase proved there is a “continuing demand” for VCT investment.
VCT are tax-incentivised investments aimed at aiding small companies raise finance to grow.
The VCT was framework was introduced in 1995 that has attracted hundreds of millions of pounds for new businesses with difficulties raising the cash from banks.
What is a Venture Capital Trust?
The schemes are supervised by fund managers who collect investments and choose the companies to finance.
Investors pick up income tax relief that rebates 30% of tax paid up to a maximum £60,000 in a tax year against a £200,000 investment – providing the VCT shares are held for at least five years.
Other tax boosts include no tax on dividends paid and no capital gains tax on the disposal of VCT shares.
Fund managers say investors are flocking to VCTs and other tax efficient investments, such as the Seed Enterprise Investment Scheme (SEIS), because the government put a celling of between £10,000 and £40,000 on pension contribution tax relief for high earners.
Once retirement savers have maxed out their pension savings for a tax year, VCT and SEIS present the most tax effective savings options.
Boost from pension caps
Ian Sayers, chief executive of the Association of Investment Companies, said: “This fundraising data is a real vote of confidence in the VCT sector. The pension rule changes and reduction in the lifetime allowance have clearly acted as a boost to investor interest along with its established track record both from a growth and income perspective.
“It is hard to predict what the final fundraising total will be for 2016/2017, as managers come to terms with recent rule changes. But what is not in doubt is that demand for VCTs remains strong.”
Fund managers say VCTs accounted for £450 million of investment in the 2015-16 tax year, but fewer entrepreneurs are planning to offer shares before the end of the current tax year in April 2017.